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Suppose that the interest rate on a one-year Treasury bill is currently 1% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 2%, 3%, and 2%, respectively. Suppose that the expectations hypothesis holds. Calculate the current interest rates on two-year, three-year, and four-year Treasury notes.

Suppose that the interest rate on a one-year Treasury bill is currently 1% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 2%, 3%, and 2%, respectively. Suppose that the expectations hypothesis holds. Calculate the current interest rates on two-year, three-year, and four-year Treasury notes.

EBK CFIN
EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter5: The Cost Of Money (interest Rates)
Section: Chapter Questions
Problem 7PROB
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7. Suppose that the interest rate on a one-year Treasury bill is currently 1% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 2%, 3%, and 2%, respectively. Suppose that the expectations hypothesis holds. Calculate the current interest rates on two-year, three-year, and four-year Treasury notes.
Transcribed Image Text:7. Suppose that the interest rate on a one-year Treasury bill is currently 1% and that investors expect that the interest rates on one-year Treasury bills over the next three years will be 2%, 3%, and 2%, respectively. Suppose that the expectations hypothesis holds. Calculate the current interest rates on two-year, three-year, and four-year Treasury notes.
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